Critically Analyse the Interpretation of Umbrella Clause in Investment Essay

Critically Analyse the Interpretation of Umbrella Clause in Investment Treaties - Essay Example investor in a host state.3 One such device is the umbrella clause. 2. Definitions of Umbrella Clause The umbrella clause is also known by other terms, such as the observance of undertakings clause, the observance of commitments clause, the pacta sunt servanda 4 clause, the sanctity of contract clause, and the mirror effect clause.5 There is no fixed wording for the clause, but it’s different manifestations are all to the effect that obligations are imposed upon the parties for those circumstances for which the contract had not specifically provided. The benefit of umbrella clause is that it can encompass all types of commitments whether express or implied, contractual or not contractual.6 The clause’s broadest version may be stated as: â€Å"Each Contracting Party shall observe any obligation it may have assumed with regard to investments.†7 As Dolzer & Stevens describes, the provision of umbrellas clause intends to ensure that contracting parties in an investmen t agreement should honour their commitments towards citizens or investors of other parts.8 Consequently, The effect of umbrella clauses is for arbitral jurisdiction to be extended more broadly to investment disputes that involve alleged default by the host state in meeting any obligation it owes to the foreign investor. Through umbrella clauses, therefore, the investor secures the state’s observance of its commitments. More state acts are thus brought â€Å"under the umbrella of protection of the treaty.†9 There are far-reaching effects of umbrella clauses, the most important of which is to extend violations of a contract relating to an investment to the status of treaty violations.10 The conventional concept of the umbrella clause was best put forward by Noble Ventures v Romania,11 which held that â€Å"the purpose of the parties in adopting an umbrella clause was ‘to equate contractual obligations governed by municipal law to international treaty obligations a s established in the BIT.†12 3. Evolution of Umbrella Clause Long before BITs were the norm and when investor-to-state arbitration was still unheard of, the only recourse of an individual who felt aggrieved by alleged illicit acts of the host state was by diplomatic protection. Traditional international law insulated governments against the direct claims of private persons (corporations and individuals), requiring aggrieved foreign investors to secure the consent of the host country before it may seek redress.13 It was a rule of customary law that a state may exercise its right of diplomatic protection only if a breach of international law has taken place, and its national has suffered some form of injury as a result thereof. The term umbrella clause was first used by an prominet international scholar Elihu Lauterpacht in a claim against Iran due to nationalisation of iranian oil fields when claim was made by the Anglo-Iranian Oil Company in 1953-54. Lauterpacht supported that an â€Å"umbrella treaty† would be implemented infringement of which would make the infringement if the